Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31,
2017

¨

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 000-6814

U.S. ENERGY CORP.

(Exact Name of Registrant as Specified in its
Charter)

Wyoming

83-0205516

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

4643 S. Ulster Street, Suite 970, Denver, CO

80237

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code:

(303) 993-3200

Not Applicable

(Former name, former address
and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). YES þ NO ¨

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company þ

Emerging growth company ¨

Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

The registrant had 6,134,506 shares of its
$0.01 par value common stock outstanding as of May 15, 2017.

Preferred stock, par value $0.01 per share. Authorized 100,000 shares, 50,000 shares of series A Convertible Preferred Stock outstanding as of March 31, 2017 and December 31, 2016; liquidation preference of $2,302 as of March 31, 2017.

The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.

-3-

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2017
AND 2016

(In Thousands, Except Share and Per Share
Amounts)

2017

2016

Revenue:

Oil

$

1,240

$

864

Natural gas and liquids

507

202

Total revenue

1,747

1,066

Operating expenses:

Oil and gas operations:

Production costs

1,053

1,030

Depreciation, depletion and amortization

270

782

Impairment of oil and gas properties

-

6,957

General and administrative:

Compensation and benefits, including directors and contract employees

176

139

Stock-based compensation

106

34

Professional fees, insurance and other

880

576

Total operating expenses

2,485

9,518

Operating loss

(738

)

(8,452

)

Other income (expense):

Realized gain (loss) on oil price risk derivatives

-

882

Unrealized gain (loss) on oil price risk derivatives

-

(573

)

Gain on investments

-

9

Rental and other income/(loss)

(216

)

21

Warrant fair value adjustment

340

-

Interest expense

(125

)

(162

)

Other expense

(1

)

-

Total other income (expense)

(2

)

177

Loss from continuing operations

(740

)

(8,275

)

Discontinued operations:

Discontinued operations

-

(2,327

)

Loss from discontinued operations

-

(2,327

)

Net loss

(740

)

(10,602

)

Change in fair value of marketable equity securities

(86

)

-

Comprehensive loss

$

(826

)

$

(10,602

)

Loss from continuing operations applicable to common shareholders

Loss from continuing operations

(740

)

(8,275

)

Accrued dividends related to Series A Convertible Preferred Stock

(69

)

(34

)

Loss from continuing operations applicable to common shareholders

(809

)

(8,309

)

Loss per share- basic & diluted

Continuing operations

$

(0.14

)

$

(1.76

)

Discontinued operations

-

(0.49

)

Total

$

(0.14

)

$

(2.25

)

Weighted average shares outstanding

Basic & diluted

5,834,568

4,705,500

The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.

Please note that 2016 “Loss
per share- basic & diluted” may differ from results reported on the Company’s quarterly report on Form 10-Q for
the period ending March 31, 2016 due to fractional shares associated with the Company’s 6 for 1 stock split in June 2016.

-4-

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017
AND 2016

(In Thousands)

2017

2016

Cash flows from operating activities:

Net loss

$

(740

)

$

(10,602

)

Loss from discontinued operations

-

2,327

Loss from continuing operations

(740

)

(8,275

)

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

Depreciation, depletion and amortization

304

818

Impairment of oil and gas properties

-

6,957

Change in fair value of oil price risk derivative

-

573

Stock-based compensation and services

106

34

Warrant fair value adjustment

(340

)

-

Other

28

105

Changes in operating assets and liabilities:

Decrease (increase) in:

Oil and gas sales receivable

(96

)

517

Other assets

(140

)

(298

)

Increase (decrease) in:

Accounts payable and accrued liabilities

533

(465

)

Accrued compensation and benefits

12

(1,072

)

Net cash used in operating activities

(333

)

(1,106

)

Cash flows from investing activities:

Capital expenditures

(21

)

(1

)

Net cash used in investing activities:

(21

)

(1

)

Cash flows from financing activities:

Proceeds from issuance of preferred stock

-

1

Net cash provided by financing activities

-

1

Discontinued operations:

Net cash used in operating activities

-

(327

)

Net cash used in discontinued operations

-

(327

)

Net decrease in cash and equivalents

(354

)

(1,433

)

Cash and equivalents, beginning of year

2,518

3,354

Cash and equivalents, end of year

$

2,164

$

1,921

Non-cash investing and financing activities:

Issuance of preferred stock in disposition of mining segment

-

$

2,000

The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements

-5-

1.

ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Operations

U.S. Energy Corp. (collectively with its subsidiaries
referred to as the “Company” or “U.S. Energy”) was incorporated in the State of Wyoming on January 26,
1966. The Company’s principal business activities are focused in the acquisition, exploration and development of oil and
gas properties in the United States.

Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and have
been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”)
regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete
financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial
statements have been included.

We have substantial debt obligations and our
ongoing capital and operating expenditures will exceed the revenue we expect to receive from our oil and natural gas operations
in the near future. If we are unable to raise substantial additional funding, refinance existing indebtedness or consummate significant
asset sales on a timely basis and/or on acceptable terms, we may be required to significantly curtail our business and operations.
The consolidated financial statements included in this report on Form 10-Q have been prepared on a going concern basis of accounting,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not reflect any adjustments that might be necessary should we be unable to continue as a going concern.
Our ability to continue as a going concern is subject to, among other factors, our ability to monetize assets, our ability to obtain
financing or refinance existing indebtedness, our ability to continue our cost cutting efforts, oil and gas commodity prices, our
ability to recognize, acquire and develop strategic interests and prospects, the speed and cost with which we can develop our prospects
and the ability to adapt our business by integrating specific operations associated with operating companies. There can be no assurance
that we will be able to obtain additional funding on a timely basis and on satisfactory terms, or at all. In addition, no assurance
can be given that any such funding, if obtained, will be adequate to meet our capital needs and support our growth. If additional
funding cannot be obtained on a timely basis and on satisfactory terms, then our operations would be materially negatively impacted
and we may be unable to continue as a going concern. If we become unable to continue as a going concern, we may find it necessary
to file a voluntary petition for reorganization under the Bankruptcy Code in order to provide us additional time to identify an
appropriate solution to our financial situation and implement a plan of reorganization aimed at improving our capital structure.

For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. Our
financial condition as of March 31, 2017, and operating results for the three months ended March 31, 2017 are not necessarily indicative
of the financial condition and results of operations that may be expected for any future interim period or for the year ending
December 31, 2017.

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates include oil and gas reserves that are used in the calculation of depreciation, depletion, amortization and
impairment of the carrying value of evaluated oil and gas properties; production and commodity price estimates used to record accrued
oil and gas sales receivable; valuation of commodity derivative instruments; the impact of commodity prices and other events affecting
impairment of mining properties; and the cost of future asset retirement obligations. The Company evaluates its estimates on an
on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable.
Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such
changes could be material.

-6-

Principles of Consolidation

The accompanying financial statements include
the accounts of the Company and its wholly-owned subsidiary Energy One LLC (“Energy One”). All inter-company balances
and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current
period presentation of the accompanying financial statements.

Comprehensive Income (Loss)

Comprehensive income (loss) is used to refer
to net income (loss) plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses,
gains, and losses that under GAAP are reported as separate components of shareholders’ equity instead of net income (loss).

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers”. This comprehensive guidance will replace all existing revenue recognition guidance and is effective for
annual reporting periods beginning after December 15, 2017, and interim periods therein. This update is not expected to have a
significant impact on the Company’s financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU is intended to
improve the recognition and measurement of financial instruments. Among other things, this ASU requires certain equity investments
to be measured at fair value with changes in fair value recognized in net income. This guidance is effective for fiscal years beginning
after December 15, 2017, and interim periods therein. This update is not expected to have a significant impact on the Company’s
financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases,
which will supersede the existing guidance for lease accounting. This ASU will require lessees to recognize leases on their balance
sheets, and leaves lessor accounting largely unchanged. This guidance is effective for fiscal years beginning after December 15,
2018 and interim periods within those fiscal years, and early adoption is permitted. This update is not expected to have a
significant impact on the Company’s financial statements.

2016-05

In March 2016, the FASB issued ASU 2016-06,
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments. The amendments clarify the steps required
to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. The amendment is effective
for fiscal years and interim periods beginning after December 1, 2016. This amendment did not have a significant impact on the
Company’s financial statements.

2016-11

In May 2016, the FASB issued ASU No. 2016-11, Revenue
Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting ("ASU 2016-11").
The SEC Staff is rescinding the following SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and
Topic 932, Extractive Activities-Oil and Gas, effective upon adoption of Topic 606. Specifically, registrants should not rely on
the following SEC Staff Observer comments upon adoption of Topic 606: a) Revenue and Expense Recognition for Freight Services in
Process which is codified in 605-20-S99-2; b) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph
605-45-S99-1; c) Accounting for Consideration Given by a Vendor to a Customer, which is codified in paragraph 605-50-S99-1 and
d) Accounting for Gas-Balancing Arrangements (that is, use of the “entitlements method”), which is codified in paragraph
932-10-S99-5. We do not use the entitlements method of accounting and are not impacted by this specific SEC Staff Observer comment;
however, we are assessing the potential impact of other SEC Staff Observer comments included in ASU 2016-11 on our consolidated
financial condition and results of operations.

-7-

2016-15

In August 2016, the FASB issued ASU No. 2016-15, Statement
of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments ("ASU
2016-15"). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows.
The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs,
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation
to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds
from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions
received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017.
We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial condition and results of operations.

2017-03

In January 2017, the FASB issued ASU No. 2017-03, Accounting
Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic
323), which stated additional qualitative disclosures should be considered to assess the significance of the impact upon adoption.
This ASU is effective for the annual period beginning after December 15, 2018, and for annual and interim periods thereafter. Early
adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated
financial condition and results of operations.

2.

LIQUIDITY & GOING CONCERN

As of March 31, 2017, the Company has a working
capital deficit of $6.8 million and an accumulated deficit of $124.6 million. Additionally, the Company incurred a net loss of
$0.7 million for the three months ended March 31, 2017. As of March 31, 2017, the Company failed to remain in compliance with financial
covenants in its credit agreement. Accordingly, the entire balance of $6.0 million is required to be classified as a current liability.
On May 2, 2017, the credit facility between U.S. Energy Corp.’s wholly-owned subsidiary, Energy One and Wells Fargo was sold,
assigned and transferred to APEG Energy II, L.P. (“APEG”). APEG purchased and assumed all of Wells Fargo’s rights
and obligations as the lender to Energy One under the credit facility. Concurrently, U.S. Energy Corp., Energy One and APEG entered
into a Limited Forbearance Agreement dated May 2, 2017. The Company believes that the Forbearance Agreement will provide the parties
sufficient time to work toward a long-term solution that enables the Company to execute its operational strategy and ensure value
for existing shareholders. Please refer to Note 13 entitled “Subsequent Events” for further information.

As of March 31, 2017, the Company had cash
and equivalents of $2.2 million. Management believes overhead and mining expense reductions have poised the Company to survive
the current low commodity price environment. However, there can be no assurance that the Company will be able to complete future
financings, dispositions or acquisitions on acceptable terms or at all.

The significantly lower oil price environment
that we have experienced since late 2014 has substantially decreased our cash flows from operating activities. Sustained low oil
prices could significantly reduce or eliminate our planned capital expenditures. If production is not replaced through the acquisition
or drilling of new wells our production levels will lower due to the natural decline of production from existing wells.

Our strategy is to continue to (1) maintain
adequate liquidity and selectively participate in new drilling and completion activities, subject to economic and industry conditions,
(2) pursue acquisition and disposition opportunities as available liquidity permits and (3) evaluate various avenues to strengthen
our balance sheet and improve our liquidity position. We expect to fund any near-term capital requirements and working capital
needs from current cash on hand. Our activity could be further curtailed if our cash flows decline from expected levels. Because
production from existing oil and natural gas wells declines over time, further reductions of capital expenditures used to drill
and complete new oil and natural gas wells would likely result in lower levels of oil and natural gas production in the future.

-8-

3.

OIL PRICE RISK DERIVATIVES

The Company’s wholly-owned subsidiary
Energy One has historically entered into crude oil derivative contracts (“economic hedges”). The derivative contracts
are priced based on West Texas Intermediate (“WTI”) quoted prices for crude oil. The Company is a guarantor of Energy
One’s obligations under the economic hedges. The objective of utilizing the economic hedges is to reduce the effect of price
changes on a portion of the Company’s future oil production, achieve more predictable cash flows in an environment of volatile
oil and gas prices and to manage the Company’s exposure to commodity price risk. The use of these derivative instruments
limits the downside risk of adverse price movements. However, there is a risk that such use may limit the Company’s ability
to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production,
restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize
the current value of its existing positions. The Company does not engage in speculative derivative activities or derivative trading
activities, nor does it use derivatives with leveraged features. As of March 31, 2017, the Company did not have any outstanding
crude oil derivative contracts.

Unrealized gains and losses resulting from
derivatives are recorded at fair value in the consolidated balance sheet. Changes in fair value, as well as realized gains (losses)
arising upon derivative contract settlements, are included in the “change in unrealized gain (loss) on oil price risk derivatives”
in the consolidated statements of operations. For the three months ended March 31, 2017 and 2016, the Company’s unrealized
losses from derivatives amounted to $0 and $0.6 million, respectively.

The reserves used in the Company’s full
cost ceiling test incorporate assumptions regarding pricing and discount rates in the determination of present value. In the calculation
of the ceiling test as of March 31, 2017, the Company used a price of $42.09 per barrel for oil and $2.65 per MMbtu for natural
gas (as further adjusted for property specific gravity, quality, local markets and distance from markets) to compute the future
cash flows of the Company’s producing properties. These prices compare to $42.75 per barrel for oil and $2.48 per MMbtu for
natural gas used in the calculation of the Ceiling Test as of December 31, 2016. The discount factor used was 10%.

For the three months ended March 31, 2017 and
2016, ceiling test impairment charges for the Company’s oil and gas properties amounted to $0 and $6,957, respectively.

5.

DISCONTINUED OPERATIONS AND PREFERRED STOCK ISSUANCE

Disposition of Mining Segment

In February 2006, the Company reacquired the
Mt. Emmons molybdenum mining properties (the “Property”). In February 2016, the Company’s Board of Directors
decided to dispose of the Property rather than continuing the Company’s long-term development strategy whereby the Company
entered into the following agreements:

A.

The Company entered into an Acquisition Agreement (the “Acquisition Agreement”) with
Mt. Emmons Mining Company, a subsidiary of Freeport-McMoRan Inc. (“MEM”), whereby MEM acquired the Property. The Company
did not receive any cash consideration for the disposition; the sole consideration for the transfer was that MEM assumed the Company’s
obligations to operate the WTP and to pay the future mine holding costs for portions of the Property that it desires to retain.

Under U.S. GAAP, the disposal of
a segment is reported as discontinued operations in the Company’s financial statements. Presented below are the assets and
liabilities associated with the Company’s mining segment as of March 31, 2017 and December 31, 2016:

-9-

2017

2016

Assets retained by the Company:

Performance bonds

$

114

$

114

Total assets of discontinued operations

$

114

$

114

B.

Concurrent with entry into the
Acquisition Agreement and as additional consideration for MEM to accept transfer of the
Property, the Company entered into a Series A Convertible Preferred Stock Purchase Agreement
(the “Series A Purchase Agreement”) with MEM, whereby the Company issued
50,000 shares of newly designated Series A Convertible Preferred Stock (the “Preferred
Stock”) to MEM in exchange for (i) MEM accepting the transfer of the Property
and replacing the Company as the permittee and operator of the WTP, and (ii) the payment
of approximately $1 to the Company. The Series A Purchase Agreement contains customary
representations and warranties on the part of the Company. As contemplated by the Acquisition
Agreement and the Series A Purchase Agreement and as approved by the Company’s
Board of Directors, the Company filed with the Secretary of State of the State of Wyoming
Articles of Amendment containing a Certificate of Designations with respect to the Preferred
Stock (the “Certificate of Designations”). Pursuant to the Certificate of
Designations, the Company designated 50,000 shares of its authorized preferred stock
as Series A Convertible Preferred Stock. The Preferred Stock accrues dividends at a rate
of 12.25% per annum of the Adjusted Liquidation Preference (as defined); such dividends
are not payable in cash but are accrued and compounded quarterly in arrears on the first
business day of the succeeding calendar quarter. At issuance, the aggregate fair value
of the Preferred Stock was $2,000 based on the initial liquidation preference of $40
per share. The “Adjusted Liquidation Preference” is initially $40 per share
of Preferred Stock, with increases each quarter by the accrued quarterly dividend. The
Preferred Stock is senior to other classes or series of shares of the Company with respect
to dividend rights and rights upon liquidation. No dividend or distribution will be declared
or paid on junior stock, including the Company’s common stock, (1) unless approved
by the holders of Preferred Stock and (2) unless and until a like dividend has been declared
and paid on the Preferred Stock on an as-converted basis.

At the option of the holder, each
share of Preferred Stock was initially convertible into approximately 13.33 shares of the Company’s $0.01 par value common
stock (the “Conversion Rate”) for an aggregate of 666,667 shares of common stock. The Conversion Rate is subject to
anti-dilution adjustments for stock splits, stock dividends, certain reorganization events, and to price-based anti-dilution protections
if the Company subsequently issues shares for less than 90% of fair value on the date of issuance. Each share of Preferred Stock
will be convertible into a number of shares of common stock equal to the ratio of the initial conversion value to the conversion
value as adjusted for accumulated dividends multiplied by the Conversion Rate. In no event will the aggregate number of shares
of common stock issued upon conversion be greater than approximately 793,000 shares. The Preferred Stock will generally not vote
with the Company’s common stock on an as-converted basis on matters put before the Company’s shareholders. The holders
of the Preferred Stock have the right to approve specified matters as set forth in the Certificate of Designations and have the
right to require the Company to repurchase the Preferred Stock in connection with a change of control. However, the Company’s
Board of Directors has the ability to prevent any change of control that could trigger a redemption obligation related to the Preferred
Stock.

During the first quarter of 2016,
the Company recorded the fair value of the Preferred Stock based on the initial liquidation preference of $2,000. Since the cash
consideration paid by MEM for the Preferred Stock was a nominal amount, the Company recorded a charge to operations of approximately
$2,000 associated with the issuance.

C.

Concurrent with entry into the
Acquisition Agreement and the Series A Purchase Agreement, the Company and MEM entered
into an Investor Rights Agreement, which provides MEM rights to certain information and
Board observer rights. MEM has agreed that it, along with its affiliates, will not acquire
more than 16.86% of the Company’s issued and outstanding shares of Common Stock.
In addition, MEM has the right to demand registration of the shares of Common Stock issuable
upon conversion of the Preferred Stock under the Securities Act of 1933, as amended.

-10-

Combined Results of Operations for Discontinued
Operations

The results of operations of the discontinued
mining operations are presented separately in the accompanying financial statements. Presented below are the components for the
three months ended March 31, 2017 and 2016:

2017

2016

Issuance of preferred stock to induce disposition

$

-

$

(1,999

)

Operating expenses of mining segment:

Water treatment plant

-

(211

)

Mine property holding costs

-

(117

)

Total results for discontinued operations

$

-

$

(2,327

)

6.

DEBT

Energy One, a wholly-owned subsidiary the Company,
has a credit facility with Wells Fargo Bank, National Association (“Wells Fargo”). As of March 31, 2017 and 2016, outstanding
borrowings under the credit facility amounted to $6.0 million. As of March 31, 2017 and 2016, the borrowing base was $6.0 million.
Borrowings under the credit facility are collateralized by Energy One’s oil and gas producing properties and substantially
all of the Company’s cash and equivalents. Each borrowing under the agreement has a term of six months, but can be continued
at the Company’s election through July 2017 if the Company remains in compliance with the covenants under the credit facility.
The weighted average interest rate on this debt is 7.39% as of March 31, 2017.

Energy One is required to comply with customary
affirmative covenants and with certain negative covenants. The principal negative financial covenants do not permit (i) the interest
coverage ratio (EBITDAX to interest expense) to be less than 3.0 to 1; (ii) total debt to EBITDAX to be greater than 3.5 to 1;
and (iii) the current ratio to be less than 1.0 to 1.0. EBITDAX is defined in the Credit Agreement as consolidated net income,
plus non-cash charges. Additionally, the Credit Agreement prohibits or limits Energy One’s ability to incur additional debt,
pay cash dividends and other restricted payments, sell assets, enter into transactions with affiliates, and to merge or consolidate
with another company. The Company is a guarantor of Energy One’s obligations under the Credit Agreement.

As of March 31, 2017, Energy One and the Company
were not in compliance with any of the financial covenants.

Because the Company projects that it is unlikely
that Energy One will regain compliance with all of the financial covenants before the July 30, 2017 maturity date, outstanding
borrowings of $6.0 million are presented as a current liability in the accompanying consolidated balance sheet as of March 31,
2017.

On May 2, 2017, the credit facility between
U.S. Energy Corp.’s wholly-owned subsidiary, Energy One and Wells Fargo was sold, assigned and transferred to APEG Energy
II, L.P. (“APEG”). APEG purchased and assumed all of Wells Fargo’s rights and obligations as the lender to Energy
One under the credit facility. Concurrently, U.S. Energy Corp., Energy One and APEG entered into a Limited Forbearance Agreement
dated May 2, 2017. The Company believes that the Forbearance Agreement will provide the parties sufficient time to work toward
a long-term solution that enables the Company to execute its operational strategy and ensure value for existing shareholders.

The credit facility requires the Company’s
compliance with certain restricted financial covenants. The Company previously violated the financial ratio covenants for the fiscal
quarters ended September 30, 2016 and December 31, 2016, which constituted an event of default under the credit agreement, and
the violation of said covenants has continued in 2017. Subject to continued performance and compliance by the Company and Energy
One with the terms and conditions of the Forbearance Agreement and credit facility, APEG has agreed not to exercise its rights
and remedies arising as a result of certain existing and prospective events of default under the credit facility until July 30,
2017. Commencing on May 2, 2017, interest shall accrue on the outstanding principal balance of the loans under the credit facility
at a rate of 8.75% per annum. In the event of default under the Forbearance Agreement, the forbearance period will terminate immediately
and, without further notice or opportunity to cure, APEG will be entitled to exercise all of its rights and remedies under the
credit facility and Forbearance Agreement, including acceleration of the debt and foreclosure. Please refer to Note 13 entitled
“Subsequent Events” for more information.

-11-

7.

COMMITMENTS AND CONTINGENCIES

Commitments

Lessee Operating Leases. In November
2015, the Company took assignment of a lease agreement for office space in Denver, Colorado. The future minimum rental commitment
under this sublease requires payments of $59,000 in 2017, when the sublease expires.

Letter of Credit. In connection with
the Company’s sublease of office space in Denver, Colorado, a security deposit was provided in the form of an irrevocable
letter of credit for $35,000. The letter of credit expires in September 2017. Collateral for the letter of credit is a certificate
of deposit for $35,000 that is included in other assets in the accompanying balance sheet as of March 31, 2017.

Contingencies

From time to time, the Company is party to
certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted
with certainty, management does not expect these matters to have a materially adverse effect on the Company’s financial position
or results of operations. Following are currently pending legal matters:

North Dakota Properties. On June 8,
2011, Brigham Oil & Gas, L.P. (“Brigham”), as the operator of the Williston 25-36 #1H Well, filed an action in
the State of North Dakota, County of Williams, in District Court, Northwest Judicial District, Case No. 53-11-CV-00495 to interplead
to the court with respect to the undistributed suspended royalty funds from this well to protect itself from potential litigation.
Brigham became aware of an apparent dispute with respect to ownership of the mineral interest between the ordinary high water mark
and the ordinary low water mark of the Missouri River. Brigham suspended payment of certain royalty proceeds of production related
to the minerals in and under this property pending resolution of the apparent dispute. Brigham was subsequently sold to Statoil
ASA (“Statoil”) who assumed Brigham’s rights and obligations under this case. The Company owns a working interest,
not royalty interest, in this well and no funds have been withheld.

On January 28, 2013, the District Court Northwest
Judicial District issued an Order for Partial Summary Judgment holding that the State of North Dakota as part of its title to the
beds of navigable waterways owns the minerals in the area between the ordinary high and low watermarks on these waterways, and
that this public title excludes ownership and any proprietary interest by riparian landowners. This issue has been appealed to
the North Dakota Supreme Court. The Company’s legal position is aligned with Brigham, who will continue to provide legal
counsel in this case for the benefit of all working interest owners.

The Company is also a party to litigation that
seeks to reform certain assignments of mineral interests it acquired from Brigham. This matter involves the depth below the surface
to which the assignments were effective. The plaintiff is seeking to reform the agreement such that the Company’s assignment
would be revised to be 12 feet closer to the surface. This dispute affects one of the Company’s producing wells.

The ultimate outcome of these matters is ongoing
and cannot presently be determined. However, in management’s opinion the likelihood of a material adverse outcome is remote.
Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the accompanying
consolidated financial statements.

Quiet Title Action – Willerson Lease.
In September 2013, the Company acquired from Chesapeake a 15% working interest in approximately 4,244 gross mineral acres referred
to as the Willerson lease. In January 2014, Willerson inquired if their lease had terminated due to the failure to achieve production
in paying quantities pursuant to the terms of the lease. The Company along with Crimson and Liberty filed a declaratory judgment
action in the District Court of Dimmit County in May 2014 seeking a determination from the court that the lease remains valid and
in effect. The lessors counterclaimed for breach of contract, trespass, and related causes of action. In January 2016, the lessors
filed a third-party petition alleging breach of contract, trespass, and related causes of action against Chesapeake and EXCO Operating
Company, LP. As of March 31, 2017 unevaluated oil and gas properties include $1,171,000 related to the leasehold costs that are
subject to this matter. The matter has settled in 2017 with the Company’s portion being $75,000 plus the related legal fees
of $165,000 as reflected in the Company’s financial statements under “Professional fees, insurance and other”
as of March 31, 2017.

-12-

Arbitration of Employment Claim. A former
employee has claimed that the Company owes up to $1.8 million under an Executive Severance and Non-Compete agreement (the “Agreement”)
due to a change of control and termination of employment without cause. The Agreement requires that any disputes be submitted to
binding arbitration and a request for arbitration was submitted by the parties in March 2016. This matter was settled in May 2017
for $175,000 plus non-essential equipment of $13,000 as reflected in the Company’s financial statements under “Rental
and other income/(loss)” as of March 31, 2017.

Contingent Ownership Interests. As of
March 31, 2017, the Company had recognized a contingent liability associated with uncertain ownership interests of $1,383. This
liability arises when the calculations of respective joint ownership interests by operators differs from the Company’s calculations.
These differences relate to a variety of matters, including allocation of non-consent interests, complex payout calculations for
individual wells and groups of wells, along with the timing of reversionary interests. Accordingly, these matters are subject to
legal interpretation and the related obligations are presented as a contingent liability in the accompanying condensed consolidated
balance sheet as of March 31, 2017. While the Company has classified this entire amount as a current liability, most of these issues
are expected to be resolved through arbitration, mediation or litigation; due to the complexity of the issues involved, there can
be no assurance that the outcome of these contingencies will be resolved during 2017.

Anfield Gain Contingency. In 2007, the
Company sold all of our uranium assets for cash and stock of the purchaser, Uranium One Inc. (“Uranium One”). The assets
sold included a uranium mill in Utah and unpatented uranium claims in Wyoming, Colorado, Arizona and Utah. Pursuant to the asset
purchase agreement, the Company was entitled to additional consideration from Uranium One up to $40,000 based on the performance
of the mill, achievement of commercial production and royalties, but no additional consideration was ever received from Uranium
One. In August 2014, the Company entered into an agreement with Anfield Resources Inc. (“Anfield”) whereby if Anfield
was successful in acquiring the property from Uranium One, Anfield would be released from the future payment obligations stemming
from the 2007 sale to Uranium One. On September 1, 2015, Anfield acquired the property from Uranium One and is now obligated to
provide the following consideration to the Company:

·

Issuance of $2,500 in Anfield common shares to the Company. The Anfield shares are to be held in
escrow and released in tranches over a 36-month period. Pursuant to the agreement, if any of the share issuances result in the
Company holding in excess of 20% of the then issued and outstanding shares of Anfield (the “Threshold”), such shares
in excess of the Threshold would not be issued at that time, but deferred to the next scheduled share issuance. If, upon the final
scheduled share issuance the number of shares to be issued exceeds the Threshold, the value in excess of the Threshold is payable
to the Company in cash,

·

$2,500 payable in cash upon 18 months of continuous commercial production, and

The first tranche of common shares resulted
in the issuance of 7,436,505 shares of Anfield with a market value of $750,000 and such shares were delivered to us in September
2015. The second tranche of shares resulted in the issuance of 3,937,652 additional shares of Anfield with a market value of $750,000,
and such shares were delivered to us in September 2016. Since the trading volume in Anfield shares has increased beginning primarily
in the quarterly period ending June 30, 2016, we determined a mark-to-market technique would be the most appropriate method to
determine the fair value for Anfield shares. The primary factor in using a mark-to-market valuation in determining the fair value
of Anfield shares is justified because of our belief that due to the increased liquidity in the stock, using current market prices
for Anfield shares reflects the most accurate fair value calculation. At March 31, 2017, we determined the fair value of the Anfield
shares to be approximately $0.9 million. The timing of any future receipt of cash from Anfield is not determinable and there can
be no assurance that any cash will ever be received from Anfield or that the shares received from Anfield will ever be liquidated
for cash.

-13-

8.

SHAREHOLDERS’ EQUITY

Preferred Stock

The Company’s articles of incorporation
authorize the issuance of up to 100,000 shares of preferred stock, $0.01 par value. Shares of preferred stock may be issued with
such dividend, liquidation, voting and conversion features as may be determined by the Board of Directors without shareholder approval. As
discussed in Note 5, in February 2016 the Board of Directors approved the designation of 50,000 shares of Series A Convertible
Preferred Stock in connection with the disposition of the Company’s mining segment.

Warrants

On December 21, 2016, the Company completed
a registered direct offering of 1.0 million shares of common stock at a net price of $1.50 per share. Concurrently, the investors
received warrants to purchase 1.0 million shares of Common Stock of the Company at an exercise price of $2.05 per share, subject
to adjustment, for a period of five years from closing. The total net proceeds received by the Company was approximately $1.32
million. The fair value of the warrants upon issuance was $1.24 million, with the remaining $0.08 million being attributed to common
stock. The warrants contain a dilutive issuance and other liability provisions which cause the warrants to be accounted for as
a liability. Such warrant instruments are initially recorded as a liability and are accounted for at fair value with changes in
fair value reported in earnings.

Stock Options

For the three months ended March 31, 2017 and
2016, total stock-based compensation expense related to stock options was $18,000 and $21,000 respectively. As of March 31, 2017, there
was $62,000 of unrecognized expense related to unvested stock options, which will be recognized as stock-based compensation expense
through January 2018. For the three months ended March 31, 2017, no stock options were granted, exercised, forfeited or expired.
Presented below is information about stock options outstanding and exercisable as of March 31, 2017 and December 31, 2016:

March 31, 2017

December 31, 2016

Shares

Price (1)

Shares

Price (1)

Stock options outstanding

390,525

$

20.64

390,525

$

20.64

Stock options exercisable

381,640

$

20.79

376,084

$

20.97

(1)

Represents the weighted average price.

The following table summarizes information
for stock options outstanding and exercisable at March 31, 2017:

Options Outstanding

Options Exercisable

Number

Exercise Price

Remaining

Number

Weighted

of

Range

Weighted

Contractual

of

Average

Shares

Low

High

Average

Term (years)

Shares

Exercise Price

56,786

$

9.00

$

9.00

$

9.00

7.8

51,231

$

9.00

49,504

12.48

12.48

12.48

6.3

49,504

12.48

98,396

13.92

17.10

15.01

2.5

98,396

15.01

185,839

22.62

30.24

29.35

1.0

182,509

29.48

390,525

$

9.00

$

30.24

$

20.64

3.2

381,640

$

20.97

-14-

As of March 31, 2017, no shares are available
for future grants under the Company’s stock option plans. Based upon the closing price for the Company’s common stock
of $0.89 per share on March 31, 2017, there was no intrinsic value related to stock options outstanding as of March 31, 2017.

Restricted Stock Grants

In January 2015, the Board of Directors granted
340,711 shares of restricted stock under the 2012 Equity Plan to four officers of the Company. These shares originally vested annually
over a period of three years. However, during 2015 vesting was accelerated for three of the four officers in connection with severance
agreements for an aggregate of 240,711 shares. The remaining 100,000 shares vested for 33,333 shares in both January 2016 and January
2017 and the remaining shares will vest for 33,334 shares in January 2018. The fair market value of the 340,711 shares on the date
of grant was approximately $511,000. On September 23, 2016, the Board of Directors granted restricted stock to each member of the
Board for 58,500 shares per Board member for an aggregate grant of 351,000 shares. The vesting of 292,500 of such shares was accelerated
in May 2017 in connection with the resignations of members of the Company’s Board of Directors. The closing price of the
Company’s common stock on the grant date was $1.74, which is expected to result in an aggregate compensation charge of $611,000
as the stock vests. For the three months ended March 31, 2017 and 2016, total stock-based compensation expense related to restricted
stock grants was $88,000 and $13,000 respectively. As of March 31, 2017, there was $84,000 of unrecognized expense related to unvested
restricted stock grants, which will be recognized as stock-based compensation expense through January 2018.

9.

INCOME TAXES

For Federal income tax purposes, as of December
31, 2016 the Company had net operating loss and percentage depletion carryovers of approximately $74.7 million and $2.5 million,
respectively. The net operating loss carryovers may be carried back two years and forward twenty years from the year the net operating
loss was generated. The net operating losses may be used to offset future taxable income and expire in varying amounts through
2035. In addition, the Company has alternative minimum tax credit carry-forwards of approximately $0.7 million which are available
to offset future federal income taxes over an indefinite period. The Company has established a valuation allowance for all deferred
tax assets including the net operating loss and alternative minimum tax credit carryforwards discussed above since the “more
likely than not” realization criterion was not met as of March 31, 2017 and 2016. Accordingly, the Company did not recognize
an income tax benefit for the three months ended March 31, 2017 and 2016.

The Company recognizes, measures, and discloses
uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. As of
March 31, 2017, gross unrecognized tax benefits are immaterial and there was no change in such benefits during the three months
ended March 31, 2017. The Company does not expect significant increase or decrease to the uncertain tax positions within the next
twelve months.

10.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed
based on the weighted average number of common shares outstanding. For the three months ended March 31, 2017 and 2016, common stock
equivalents excluded from the calculation of weighted average shares because they were antidilutive are as follows:

2017

2016

Stock options

390,525

390,525

(1)

Unvested shares of restricted common stock

356,555

11,111

(1)

Total

747,080

401,636

(1)

Includes weighted average number of shares for options and shares of restricted stock issued during
the period.

-15-

11.

SIGNIFICANT CONCENTRATIONS

The Company has exposure to credit risk in
the event of nonpayment by the joint interest operators of the Company’s oil and gas properties. Approximately 27% of the
Company’s proved developed oil and gas reserve quantities are associated with wells that are operated by a single operator
(the “Major Operator”). As of March 31, 2017 and December 31, 2016, the Company had a liability to the Major Operator
of $2,923,000 and $2,710,000 respectively, for accrued operating expenses and overpayments of net revenues when the Major Operator
failed to recognize that the Company’s ownership interest reverted after payout was achieved for certain wells during 2014
and 2015. Beginning in the second quarter of 2015, the Major Operator began withholding the Company’s net revenues from all
wells that it operates for the Company and management expects the Major Operator will continue to withhold the Company’s
net revenues until this liability is paid in full. Based on the oil and gas prices and costs used in the Company’s reserve
report as of March 31, 2017, this liability is not expected to be fully settled until the first quarter of 2020, but under higher
pricing scenarios the Company expects the liability will be repaid from future production. Accordingly, the aggregate balances
are presented as current liabilities in the accompanying consolidated balance sheets.

12.

FAIR VALUE MEASUREMENTS

Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In
determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches,
the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use
of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the
valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair
value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities
carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 - Quoted prices for identical assets
and liabilities traded in active exchange markets, such as the New York Stock Exchange.

Level 2 - Observable inputs other than Level
1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that
can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined
using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.

Level 3 - Unobservable inputs supported by
little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment
or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.

The Company has processes and controls in place
to attempt to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing
service providers in order to support their use in the valuation process. Where market information is not available to support
internal valuations, independent reviews of the valuations are performed and any material exposures are evaluated through a management
review process.

While the Company believes its valuation methods
are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following
is a description of the valuation methodologies used for complex financial instruments measured at fair value:

-16-

Marketable Equity Securities Valuation Methodologies

The fair value of available for sale securities
is based on quoted market prices obtained from independent pricing services. Accordingly, the Company has classified these instruments
as Level 1.

Warrant Valuation Methodologies

The warrants contain a dilutive issuance and
other liability provisions which cause the warrants to be accounted for as a liability. Such warrant instruments are initially
recorded and valued as a level 3 liability and are accounted for at fair value with changes in fair value reported in earnings.

The Company estimated the value of the warrants
issued with the Securities Purchase Agreement on December 31, 2016 to be $1,030,000, or $1.03 per warrant, using the Monte Carlo
model with the following assumptions: a term expiring June 21, 2022, exercise price of $2.05, stock price of $1.28, average volatility
rate of 90%, and a risk-free interest rate of 2.01%. The Company re-measured the warrants as of March 31, 2017, using the same
Monte Carlo model, using the following assumptions: a term expiring June 21, 2022, exercise price of $2.05, stock price of $0.89,
average volatility rate of 88%, and a risk-free interest rate of 1.97%. As of March 31, 2017, the fair value of the warrants was
$690,000, or $0.69 per warrant, and was recorded as a liability on the accompanying consolidated balance sheets. An increase in
any of the variables would cause an increase in the fair value of the warrants. Likewise, a decrease in any variable would cause
a decrease in the value of the warrants.

Other Financial Instruments

The carrying amount of cash and equivalents,
oil and gas sales receivable, other current assets, accounts payable and accrued expenses approximate fair value because of the
short-term nature of those instruments. The recorded amounts for the Senior Secured Revolving Credit Facility discussed in Note
6 approximates the fair market value due to the variable nature of the interest rates, and the fact that market interest rates
have remained substantially the same since the latest amendment to the credit facility.

Recurring Fair Value Measurements

Recurring measurements of the fair value of
assets and liabilities as of March 31, 2017 and December 31, 2016 are as follows:

March 31, 2017

December 31, 2016

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Marketable equity securities:

Sutter Gold Mining Company

$

15

$

-

$

-

$

15

$

16

$

-

$

-

$

16

Anfield Resources, Inc.

846

-

-

846

930

-

-

930

Total

$

861

$

-

$

-

$

861

$

946

$

-

$

-

$

946

Outstanding warrant liability

$

-

$

-

$

690

$

690

$

-

$

-

$

1,030

$

1,030

The following table presents a reconciliation of changes in assets
and liabilities measured at fair value on a recurring basis for the period ended March 31, 2017 and the year ended December 31,
2016.

-17-

Assets

Liabilities

Marketable Securities

Sutter

Anfield

Warrants

(Level 1)

(Level 1)

(Level 3)

Net

Fair value, December 31, 2016

$

16

$

930

$

1,030

$

1,976

Total net losses included in:

Other comprehensive loss

(1

)

-

-

(1

)

Fair value adjustments included in net loss:

Net unrealized gain on warrant fair value adjustment

-

-

(340

)

(340

)

Net unrealized loss on Anfield shares

-

(84

)

-

(84

)

Fair value, March 31, 2017

$

15

$

846

690

$

1,551

13.

SUBSEQUENT EVENTS

On April 5, 2017, for the period beginning
May 1, 2017 through December 31, 2017, the Company entered into crude oil swap contracts for 300 barrels per day at $52.40 per
barrel.

On May 2, 2017, the credit facility between
U.S. Energy Corp.’s wholly-owned subsidiary, Energy One and Wells Fargo was sold, assigned and transferred to APEG Energy
II, L.P. (“APEG”). APEG purchased and assumed all of Wells Fargo’s rights and obligations as the lender to Energy
One under the credit facility. Concurrently, U.S. Energy Corp., Energy One and APEG entered into a Limited Forbearance Agreement
dated May 2, 2017. The Company believes that the Forbearance Agreement will provide the parties sufficient time to work toward
a long-term solution that enables the Company to execute its operational strategy and ensure value for existing shareholders.

The credit facility requires the Company’s
compliance with certain restricted financial covenants. The Company previously violated the financial ratio covenants for the fiscal
quarters ended September 30, 2016 and December 31, 2016, which constituted an event of default under the credit agreement, and
the violation of said covenants has continued in 2017. Subject to continued performance and compliance by the Company and Energy
One with the terms and conditions of the Forbearance Agreement and credit facility, APEG has agreed not to exercise its rights
and remedies arising as a result of certain existing and prospective events of default under the credit facility until July 30,
2017. Commencing on May 2, 2017, interest shall accrue on the outstanding principal balance of the loans under the credit facility
at a rate of 8.75% per annum. In the event of default under the Forbearance Agreement, the forbearance period will terminate immediately
and, without further notice or opportunity to cure, APEG will be entitled to exercise all of its rights and remedies under the
credit facility and Forbearance Agreement, including acceleration of the debt and foreclosure. For additional information please
see the 8-K filed by the Company on May 8, 2017.

-18-

ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Form 10-Q contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included
in and incorporated by reference into this Form 10-Q are forward-looking statements. When used in this Form 10-Q, the words “will”,
“expect”, “anticipate”, “intend”, “plan”, “believe”, “seek”,
“estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. Forward-looking statements in this Form 10-Q include statements regarding our expected
future revenue, income, production, liquidity, cash flows, reclamation and other liabilities, expenses and capital projects, future
capital expenditures and future transactions. Because these forward-looking statements involve risks and uncertainties, actual
results could differ materially from those expressed or implied by these forward-looking statements due to a variety of factors,
including those associated with our ability to find oil and natural gas reserves that are economically recoverable, the volatility
of oil, NGL and natural gas prices, declines in the values of our properties that have resulted in and may in the future result
in additional ceiling test write downs, our ability to replace reserves and sustain production, our estimate of the sufficiency
of our existing capital sources, our ability to raise additional capital to fund cash requirements for our participation in oil
and gas properties and for future acquisitions, the uncertainties involved in estimating quantities of proved oil and natural gas
reserves, in prospect development and property acquisitions or dispositions and in projecting future rates of production or future
reserves, the timing of development expenditures and drilling of wells, hurricanes and other natural disasters and the operating
hazards attendant to the oil and gas and minerals businesses. In particular, careful consideration should be given to cautionary
statements made in the “Risk Factors” section of our 2015 Annual Report on Form 10-K and other quarterly reports on
Form 10-Q filed with the SEC, all of which are incorporated herein by reference. The Company undertakes no duty to update or revise
any forward-looking statements.

General Overview

We are an independent energy company focused
on the lease acquisition and development of oil and gas producing properties in the continental United States. Our business is
currently focused in South Texas and the Williston Basin in North Dakota. However, we do not intend to limit our focus to these
geographic areas. We continue to focus on increasing production, reserves, revenues and cash flow from operations while managing
our level of debt.

We currently explore for and produce oil and
gas through a non-operator business model; however, we may operate oil and gas properties for our own account and may expand our
holdings or operations into other areas. As a non-operator, we rely on our operating partners to propose, permit and manage wells.
Before a well is drilled, the operator is required to provide all oil and gas interest owners in the designated well the opportunity
to participate in the drilling costs and revenues of the well on a pro-rata basis. After the well is completed, our operating partners
also transport, market and account for all production. As discussed in Item 1. Business, our long-term strategic focus is to develop
operational capabilities through the pursuit of opportunities to acquire operated properties and/or operatorship of existing properties.

Recent Developments

Effective May 1, 2017 through December 31,
2017, the Company entered into crude oil swap contracts for 300 barrels per day at $52.40 per barrel.

On May 2, 2017, the credit facility between
U.S. Energy Corp.’s wholly-owned subsidiary, Energy One and Wells Fargo was sold, assigned and transferred to APEG Energy
II, L.P. (“APEG”). APEG purchased and assumed all of Wells Fargo’s rights and obligations as the lender to Energy
One under the credit facility. Concurrently, U.S. Energy Corp., Energy One and APEG entered into a Limited Forbearance Agreement
dated May 2. The Company believes that the Forbearance Agreement will provide the parties sufficient time to work toward a long-term
solution that enables the Company to execute its operational strategy and ensure value for existing shareholders.

-19-

The credit facility requires the Company’s
compliance with certain restricted financial covenants. The Company previously violated the financial ratio covenants for the fiscal
quarters ended September 30, 2016 and December 31, 2016, which constituted an event of default under the credit agreement, and
the violation of said covenants has continued in 2017. Subject to continued performance and compliance by the Company and Energy
One with the terms and conditions of the Forbearance Agreement and credit facility, APEG has agreed not to exercise its rights
and remedies arising as a result of certain existing and prospective events of default under the credit facility until July 30,
2017. Commencing on May 2, 2017, interest shall accrue on the outstanding principal balance of the loans under the credit facility
at a rate of 8.75% per annum. In the event of default under the Forbearance Agreement, the forbearance period will terminate immediately
and, without further notice or opportunity to cure, APEG will be entitled to exercise all of its rights and remedies under the
credit facility and Forbearance Agreement, including acceleration of the debt and foreclosure. For additional information please
see the 8-K filed by the Company on May 8, 2017.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial
statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to
make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary
of our significant accounting policies is detailed in Note 1 – Organization, Operations and Significant Accounting Polices
in Item 8 of our 2016 Annual Report on Form 10-K filed with the SEC on April 17, 2017.

Recently Issued Accounting Standards

Please refer to the section entitled Recent
Accounting Pronouncements under Note 1 – Organization, Operations and Significant Accounting Policies in
the Notes to the Financial Statements included in Item 1 of this report for additional information on recently issued accounting
standards and our plans for adoption of those standards.

Results of Operations

Comparison of our Statements of Operations
for the Three Months Ended March 31, 2017 and 2016

During the three months ended March 31, 2017,
we recorded a net loss of $0.7 million as compared to a net loss of $10.6 million for the three months ended March 31, 2016. Our
loss from continuing operations was $0.7 million for the three months ended March 31, 2017 compared to $8.3 million for the three
months ended March 31, 2016. In the following sections we discuss our revenue, operating expenses, non-operating income, and discontinued
operations for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

Revenue. Presented below is a comparison
of our oil and gas sales, production quantities and average sales prices for the three months ended March 31, 2017 and 2016 (dollars
in thousands, except average sales prices):

Change

2017

2016

Amount

Percent

Revenue:

Oil

$

1,240

$

864

$

376

43

%

Gas

507

202

305

151

%

Total

$

1,747

$

1,066

$

681

64

%

Production quantities:

Oil (Bbls)

29,036

39,648

(10,612

)

-27

%

Gas (Mcfe)

125,094

65,878

59,216

90

%

BOE

49,885

50,628

(743

)

-1

%

Average sales prices:

Oil (Bbls)

$

42.70

$

21.79

$

20.91

96

%

Gas (Mcfe)

4.05

3.07

0.98

32

%

BOE

35.02

21.06

13.96

66

%

-20-

The increase in our oil sales of $0.4 million
for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily the result of a 96%
increase in the average oil price realized during the three months ended March 31, 2017. The increase in the average oil price
realized offset a 27% reduction in our oil production quantity during the three months ended March 31, 2017. The increase in our
gas sales of $0.3 million for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was driven
by a 90% increase in our gas production combined with a 32% increase in the average gas price realized during the three months
ended March 31, 2017. The increase in our net realized oil price is reflective of the partial recovery in global commodity prices
during the first quarter of 2017. During the last year, the differential between West Texas Intermediate (“WTI”) quoted
prices for crude oil and the prices we realize for sales in the Williston Basin was approximately $8.00 per barrel lower. We expect
this differential to continue (with the amount of the differential varying over time) and that our oil sales revenue will be affected
by lower realized prices from this region.

For the three months ended March 31, 2017,
we produced 49,885 BOE, or an average of 554 BOE per day, as compared to 50,628 BOE or 556 BOE per day during the comparable period
in 2016. This 1% reduction was attributable to several factors, including (i) the normal decline in production for wells in the
area of our properties, (ii) we did not add significant reserves from drilling or acquisition over the past year, and (iii) in
this low price environment operators have an incentive to scale back production until prices recover.

Oil and Gas Production Costs. Presented below is a comparison
of our oil and gas production costs for the three months ended March 31, 2017 and 2016 (dollars in thousands):

Change

2017

2016

Amount

Percent

Production taxes and other expenses

$

353

$

158

$

195

123

%

Lease operating expenses

700

872

(172

)

-20

%

Total

$

1,053

$

1,030

$

23

2

%

For the three months ended March 31, 2017,
production taxes and other expenses increased by $0.2 million compared to the comparable period in 2016. Substantially all of this
increase in production taxes resulted from increased oil and gas sales. For the three months ended March 31, 2017, lease operating
expense decreased by $0.2 million which was primarily due to the implementation of cost reduction strategies by the operators of
our wells. During 2017, we expect cost reduction implementation programs to continue during the prolonged global commodity price
downtown.

Depreciation, depletion and amortization.
Our DD&A rate for the three months ended March 31, 2017 was $5.25 per BOE compared to $15.45 per BOE for the three months
ended March 31, 2016. Our DD&A rate can fluctuate as a result of changes in drilling and completion costs, impairments, divestitures,
changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped
reserves. The primary factor that resulted in a reduction in our DD&A rate for the three months ended March 31, 2017 was $9.6
million of aggregate quarterly impairment charges that resulted from our quarterly Full Cost Ceiling limitations during 2016. During
each of the quarters ended March 31, 2016 and June 30, 2016, we recognized impairment charges which reduced the net capitalized
costs subject to future DD&A calculations. Accordingly, our DD&A rate per BOE decreased as we reduced the net capitalized
costs by the quarterly impairment charges discussed below.

-21-

Impairment of oil and gas properties. During
the three months ended March 31, 2017 and 2016, we recorded impairment charges related to our oil and gas properties of $0.0 million
and $7.0 million, respectively, because the net capitalized costs were in excess of the Full Cost Ceiling limitation. These quarterly
impairment charges were primarily due to the deepening declines in the price of oil beginning in 2015 and continuing through 2016.
Presented below are the weighted average prices (before applying the impact of basis differentials between the benchmark prices
and the actual prices realized for our wells) used to prepare our reserve estimates and to calculate our Full Cost Ceiling limitations
for each of the last five calendar quarters, along with the impairment charges recognized during each of those quarters (dollars
in thousands, except average prices):

Average Price (1)

Oil

Gas

Impairment

(Bbl)

(MMbtu)

Charge

First quarter of 2016

$

46.26

$

2.40

$

6,957

Second quarter of 2016

43.12

2.24

2,611

Third quarter of 2016

41.68

2.28

-

Fourth quarter of 2016

42.75

2.48

-

First quarter of 2017

47.61

2.73

-

(1)

Represents the trailing 12-month average for benchmark oil and gas prices ending in the last month
of the calendar quarter shown.

Our quarterly reserve reports are prepared
based on a trailing 12-month average for benchmark oil and gas prices.

General and Administrative Expenses. Presented
below is a comparison of our general and administrative expenses for the three months ended March 31, 2017 and 2016 (dollars in
thousands):

Change

2017

2016

Amount

Percent

Compensation and benefits, including directors

$

176

$

139

$

37

27

%

Stock-based compensation

106

34

72

212

%

Professional fees

880

365

515

141

%

Insurance, rent and other

101

211

(110

)

-52

%

Total

$

1,263

$

749

$

514

69

%

General and administrative expenses increased
by $0.5 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This increase was
primarily attributable to (i) an increase of $0.5 million in professional fees as we replaced some of the services previously performed
by employees with consultants combined with a legal settlement on the Willerson lease (See Note 7 Commitments and Contingencies),
and (ii) an increase in stock-based compensation which primarily resulted from the amortization of restricted stock grants issued
in September 2016.

Non-Operating Income (Expense). Presented
below is a comparison of our non-operating income (expense) for the three months ended March 31, 2017 and 2016 (dollars in thousands):

Change

2017

2016

Amount

Percent

Realized gain on oil price risk derivatives

$

-

$

882

$

(882

)

N/A

Unrealized loss on oil price risk derivatives

-

(573

)

573

N/A

Unrealized gain on marketable equity securities

-

9

(9

)

N/A

Rental and other income (expense), net

(28

)

21

(49

)

-233

%

Warrant revaluation gain

340

-

340

N/A

Interest expense

(125

)

(162

)

37

23

%

Employee Arbitration Settlement

(188

)

-

(188

)

N/A

Other expense

(1

)

-

(1

)

N/A

Total other income (expense)

$

(2

)

$

177

$

(179

)

-101

%

-22-

During the three months ending March 31, 2017,
the Company had no outstanding crude derivative contacts outstanding and therefore did not recognize any gain or loss compared
to a gain of $0.9 million for the comparable period in 2016. Unrealized gains or losses result from changes in the fair value of
the derivatives as commodity prices increase or decrease. Unrealized losses are also recognized in the month when derivative contracts
are settled in cash through the recognition of a realized gain. Similarly, unrealized gains are also recognized in the month when
derivative contracts are settled in cash through the recognition of a realized loss.

During the three months ending March 31, 2017,
we realized a non-cash gain on the revaluation of our outstanding warrants of $0.3 million. Our warrant liability is accounted
for using the mark-to-market accounting method whereby gains and losses from changes in the fair value of derivative instruments
are recognized immediately into earnings. No warrants were outstanding for the period ending March 31, 2016. We will continue to
revalue our outstanding warrants on a quarterly basis.

Interest expense decreased by $0.04 million
during the three months ended March 31, 2017 compared to the comparable period in 2016. The decrease was attributable to the one-time
amortization of a debt issuance cost that was recognized in the three months March 31, 2016. The average interest rate increased
to 7.39% for the three months ended March 31, 2017 in comparison to 2.95% for the three months ended March 31, 2016. See Note 8
for additional information on the Employee Arbitration Settlement.

Discontinued Operations. In February
2016 we completed the disposition of our mining segment to Mt. Emmons Mining Company (“MEM”), including the Keystone
Mine, the WTP and other related properties. A significant objective for completing the disposition was to improve future profitability
through the elimination of the obligations to operate the WTP and mine holding costs, which are expected to result in estimated
annual cash savings of $3.0 million. During the three months ended March 31, 2017 and 2016, we incurred operating expenses associated
with the discontinued mining segment of $0 and $0.3 million, respectively.

In order to induce MEM to assume the Company’s
obligations to operate the WTP we issued additional consideration in the form of 50,000 shares of Series A Convertible Preferred
Stock. For the three months ended March 31, 2016, we recorded the fair value of the Preferred Stock based on the initial liquidation
preference of $2.0 million. Since the cash consideration paid by MEM for the Preferred Stock was $500, we recorded a charge to
discontinued operations of approximately $2.0 million associated with the issuance. There were no charges associated with discontinued
operations for the period ended March 31, 2017.

Non-GAAP Financial Measures- Adjusted EBITDAX

Adjusted EBITDAX represents income (loss) from
continuing operations as further modified to eliminate impairments, depreciation, depletion and amortization, stock-based compensation
expense, loss on investments and other non-operating income or expense, income taxes, unrealized derivative gains and losses, interest
expense, exploration expense, and other items set forth in the table below. Adjusted EBITDAX excludes certain items that we believe
affect the comparability of operating results and can exclude items that are generally one-time in nature or whose timing and/or
amount cannot be reasonably estimated.

Adjusted EBITDAX is a non-GAAP measure that
is presented because we believe it provides useful additional information to investors and analysts as a performance measure. In
addition, adjusted EBITDAX is widely used by professional research analysts and others in the valuation, comparison, and investment
recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research
of industry research analysts in making investment decisions. Adjusted EBITDAX should not be considered in isolation or as a substitute
for net income (loss), income (loss) from operations, net cash provided by operating activities, or profitability or liquidity
measures prepared under GAAP. Because adjusted EBITDAX excludes some, but not all items that affect net income (loss) and may vary
among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies. Our wholly-owned
subsidiary, Energy One LLC, is also subject to a debt to adjusted EBITDAX ratio as one of the financial covenants under its Credit
Facility and the calculation for purposes of the Credit Facility differs from our financial reporting definition.

-23-

The following table provides reconciliations
of income (loss) from continuing operations to adjusted EBITDAX for the three months ended March 31, 2017 and 2016:

2017

2016

Loss from continuing operations (GAAP)

$

(740

)

$

(8,275

)

Impairment of oil and gas properties

-

6,957

Depreciation, depletion and amortization

304

818

Unrealized loss on oil price risk derivatives

-

573

Unrealized gain on marketable equity securities

-

(9

)

Stock-based compensation

106

34

Warrant fair value adjustment (gain) loss

(340

)

-

Interest expense

125

162

Adjusted EBITDAX (Non-GAAP)

$

(545

)

$

260

Liquidity and Capital Resources

The following table sets forth certain measures
of our liquidity as of March 31, 2017 and December 31, 2016:

2017

2016

Change

Cash and equivalents

$

2,164

$

2,518

$

(354

)

Working capital deficit (1)

(6,838

)

(6,043

)

(795

)

Total assets

16,325

16,767

(442

)

Outstanding debt under Credit Facility

6,000

6,000

-

Borrowing base under Credit Facility

6,000

6,000

-

Total shareholders' equity

3,038

3,758

(720

)

Select Ratios

Current ratio (2)

0.41 to 1.00

0.45 to 1.00

Debt to equity ratio (3)

1.97 to 1.00

1.59 to 1.00

(1)

Working capital deficit
is computed by subtracting total current liabilities from total current assets.

(2)

The current ratio is computed by dividing total current assets by total current liabilities.

(3)

The debt to equity ratio is computed by dividing total debt by total shareholders’ equity.

As of March 31, 2017, we have a working capital
deficit of $6.8 million compared to a working capital deficit of $6.0 million as of December 31, 2016, an increase of $0.7 million.
This increase was primarily attributable to a reduction in cash by $0.4 million, primarily driven by an increase in professional
service fees, and an increase in payables to operators of $0.3 million, and an accrual for the settlement of the Employee Arbitration
(See Note 7 Commitments and Contingencies).

As of March 31, 2017, Energy One and the Company
were not in compliance with any of the financial covenants under its credit facility. Because the Company projects that it is unlikely
that Energy One will regain compliance with all of the financial covenants before the July 30, 2017 maturity date, outstanding
borrowings of $6.0 million are presented as a current liability in the accompanying consolidated balance sheet as of March 31,
2017.

-24-

On May 2, 2017, the credit facility between
U.S. Energy Corp.’s wholly-owned subsidiary, Energy One and Wells Fargo was sold, assigned and transferred to APEG Energy
II, L.P. (“APEG”). APEG purchased and assumed all of Wells Fargo’s rights and obligations as the lender to Energy
One under the credit facility. Concurrently, U.S. Energy Corp., Energy One and APEG entered into a Limited Forbearance Agreement
dated May 2, 2017. The Company believes that the Forbearance Agreement will provide the parties sufficient time to work toward
a long-term solution that enables the Company to execute its operational strategy and ensure value for existing shareholders.

The credit facility requires the Company’s
compliance with certain restricted financial covenants. The Company previously violated the financial ratio covenants for the fiscal
quarters ended September 30, 2016 and December 31, 2016, which constituted an event of default under the credit agreement, and
the violation of said covenants has continued in 2017. Subject to continued performance and compliance by the Company and Energy
One with the terms and conditions of the Forbearance Agreement and credit facility, APEG has agreed not to exercise its rights
and remedies arising as a result of certain existing and prospective events of default under the credit facility until July 30,
2017. Commencing on May 2, 2017, interest shall accrue on the outstanding principal balance of the loans under the credit facility
at a rate of 8.75% per annum. In the event of default under the Forbearance Agreement, the forbearance period will terminate immediately
and, without further notice or opportunity to cure, APEG will be entitled to exercise all of its rights and remedies under the
credit facility and Forbearance Agreement, including acceleration of the debt and foreclosure. For additional information please
see the 8-K filed by the Company on May 8, 2017.

During 2015 and 2014, we received significant
overpayments due to an operator’s failure to timely recognize the payout implications of our joint operating agreements.
During the second quarter of 2015, the operator corrected its records and has elected to begin withholding the net revenues from
all of our wells that it operates to recover these overpayments. As of March 31, 2017, the balance of the overpayment was approximately
$2.9 million. Based on the oil and gas prices and costs used in the Company’s reserve report as of March 31, 2017, this liability
is not expected to be fully settled until the first quarter of 2020, but under higher pricing scenarios we expect the entire liability
will be repaid sooner. The aggregate balances are presented as current liabilities in our consolidated balance sheets.

We believe certain operators have failed to
allocate our share of non-consent ownership interests which results in contingent liabilities to the extent we have not been billed
for our proportionate share of such interests, and contingent assets to the extent that we have not received our share of the net
revenues. We record net contingent liabilities for the obligations that we believe are probable which amounted to $1.4 million
as of March 31, 2017. The ultimate resolution of these uncertainties about our working interests and net revenue interests can
extend over a long period of time and we cannot provide any assurance that these matters will be resolved within the next year.

As of March 31, 2017, we had cash and equivalents
of $2.2 million, and we expect to maintain cash balances in this range for some time. We also expect potential investors and lenders
will find our singular industry focus, combined with attractive producing properties and a low-cost overhead structure to be an
attractive vehicle to partner with the Company during this continued industry downturn and low commodity price environment. However,
there can be no assurance that we will be able to complete future transactions on acceptable terms or at all.

If we have unanticipated needs for financing
in 2017, alternatives that we will consider if necessary include selling or joint venturing an interest in some of our oil and
gas assets, selling our real estate assets in Wyoming, selling our marketable equity securities, issuing shares of our common stock
for cash or as consideration for acquisitions, and other alternatives, as we determine how to best fund our capital programs and
meet our financial obligations.

-25-

Our capital expenditure plan and our ability
to obtain sufficient funding to make anticipated capital expenditures and satisfy our financial obligations are subject to numerous
risks and uncertainties, including the risk of continued low commodity prices or further reductions in those prices, the risk that
breaches of covenants in our Credit Facility will not be waived and will result in liquidation, bankruptcy or similar proceedings,
the risk that we will be unable to enter into additional financing arrangements on acceptable terms or at all, and numerous other
risks, including those discussed in Risk Factors in our 2016 Annual Report on Form 10-K.

Cash Flows

The following table summarizes our cash flows
for the three months ended March 31, 2017 and 2016 (in thousands):

2017

2016

Change

Net cash provided by (used in):

Operating activities

$

(333

)

$

(1,106

)

$

773

Investing activities

(21

)

(1

)

(20

)

Financing activities

-

1

(1

)

Discontinued operations

-

(327

)

327

Operating Activities. Cash used in operating
activities for the three months ended March 31, 2017 was $0.3 million as compared to cash used by operated activities $1.1 million
for the comparable period in 2016, an improvement of $0.8 million. The improvement is primarily attributed to severance agreements
with previous employees being paid in the period ended March 31, 2016.

Investing Activities. Cash used in investing
activities for the three months ended March 31, 2017 was $0.02 million as compared to cash used in investing activities of $0.01
million for the comparable period in 2016. The primary use of cash in our investing activities for 2017 was for capital workovers
for our oil and gas drilling activities.

Financing Activities. For the three
months ended March 31, 2017, we had no cash flow from financing compared to March 31, 2016 of a nominal amount received for the
issuance of Series A Convertible Preferred Stock.

Discontinued Operations. We had no cash
used for discontinued operations for the three months ended of March 31, 2017. Cash used in discontinued operations was $0.3 million
for the three months ended March 31, 2016.

Off-balance Sheet Arrangements

As part of our ongoing business, we have not
participated in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We evaluate our transactions to determine if
any variable interest entities exist. If it is determined that we are the primary beneficiary of a variable interest entity, that
entity will be consolidated in our consolidated financial statements. We have not been involved in any unconsolidated SPE transactions
during the periods covered by this report.

-26-

Item 3. Quantitative and Qualitative Disclosures About Market
Risk

As a smaller reporting company, we are not required to provide the
information under this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of our quarter ended March
31, 2017, our Chief Executive Officer and Principal Financial Officer (both roles are currently held by the same individual) determined
that our controls were not adequate due to a vacancy in certain accounting and finance consulting positions that the Company has
historically utilized to implement the Company’s review of key controls in a timely manner. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely
basis. Accordingly, based on this material weakness, our Chief Executive Officer and Principal Financial Officer concluded that
our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form
10-Q, March 31, 2017 as it relates to the timely implementation of the Company’s review of key controls. The Company has
addressed this weakness by filling the consulting vacancy with professionals with experience in implementing a full review of key
controls on an ongoing basis.

Changes in Internal Control over Financial
Reporting

During the fiscal quarter ended March 31, 2017,
there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely
to materially affect our internal control over financial reporting.

-27-

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Except as set forth above in Note 7 to the
Financial Statements as to the Willerson matter and an employment claim, there have been no material changes from the legal proceedings
as previously disclosed in Item 3 of our 2016 Annual Report on Form 10-K.

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to provide the
information under this Item.

† In accordance with SEC Release 33-8238, Exhibit 32.1 is
being furnished and not filed.

-28-

SIGNATURES

Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

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